Why Ensemble Capital is Bullish on First American Financial (FAF) Stock?

Ensemble Capital, an independently-owned investment firm, recently published its first-quarter Ensemble Fund commentary – a copy of which can be downloaded here. During the first quarter of 2020, the Ensemble Fund returned -18.6%, while the benchmark S&P 500 was down 19.6%.

In the said letter, Ensemble Capital highlighted a few stocks and First American Financial Corp (NYSE:FAF) is one of them. First American operates as an insurance company. Year-to-date, FAF stock lost 21.5% and on May 4th it had a closing price of $45.10. Its market cap is of $5.03 billion. Here is what Ensemble Capital said:

“First American Financial Corp. (3.8% weight in portfolio): First American Financial, along with their competitor Fidelity National Title, control most of the title insurance market in the United States. When you buy a home with a mortgage, the lender requires title insurance to make sure that the seller has full and clear title to the property. While it is just one small piece of the overall home buying transaction, when you sit down to sign the final closing paperwork to buy a house you will generally find yourself sitting in the office of First American or Fidelity National as title companies provide the escrow services to allow the buyer and seller to transfer cash and title to escrow before each is released to the other side.

Of course, the number of home sales is going to drop dramatically during this spring selling season. It is not legal in many parts of the country to host or attend an open house. But the fact is, Americans are still going to want to buy and sell homes in the future. Indeed, while home prices have increased a lot in recent years, the number of home transactions, the primary driver of First American’s business, have run at historically low levels. The rate of growth in January and February was heating up and growing at the fastest rate since prior to the housing bust over a decade ago. So, while home buyers may spend shelter-in-place browsing Zillow and Redfin in search of their next home, when economic activity returns, we expect First American to benefit greatly from the pent-up demand that will be even stronger given even lower rates on mortgages.

While there has been little in the way of new competition to title companies, we expect that many of the small digital first startups that are interested in competing will not be able to survive. Instead, industry participants will be far more focused on staying loyal to First American knowing that in a crisis as well as when trying to emerge from a crisis, if you are engaging in multimillion dollar complicated transactions such as buying and selling homes, you want to work with a trusted leader. As an aside, it is worth noting that title services along with many of the functions involved in home transactions have been deemed essential services and, thus, can continue during shelter-in-place.”

In Q4 2019, the number of bullish hedge fund positions on FAF stock increased by about 11% from the previous quarter (see the chart here).

Disclosure: None. This article is originally published at Insider Monkey.